Brent’s liquidity, Nexen, 'crude' Vancouver & more

Last Friday, the Brent forward month futures price plummeted to US$110.65 per barrel thereby losing all of the gains it made in 2013. The WTI price declined in near furious tandem to US$91.92; the  benchmark's lowest intraday price since January 4. An Italian political stalemate and US spending cuts enforced by Congressional gridlock have unleashed the bearish trends. Quite frankly, the troublesome headwinds aren’t going anywhere, anytime soon.

Prior to the onset of recent bearish trends, Bank of America said the upper limit for Brent crude will rise from US$140 per barrel this year to US$175 in 2017 because of constraints on supply. It added that WTI may slip to “US$50 within the next two years” amid booming North American supply. Meanwhile, ratings agency Moody’s expects strong global crude prices in the near term and beyond, with a continued US$15 per barrel premium in favour of Brent versus WTI over 2013.

Moody's still assumes that Brent crude will sell for an average US$100 per barrel in 2013, US$95 in 2014, and US$90 in the medium term, beyond 2014. For WTI, the agency leaves its previous assumptions unchanged at US$85 in 2013, 2014 and thereafter. Away from the fickle pricing melee, there was a noteworthy development last month in terms of Brent’s liquidity profile as a benchmark, which is set to be boosted.

On February 19, Platts proposed the introduction of a quality premium for Ekofisk and Oseberg crudes; two of the four grades constituting the Dated Brent marker. A spokesperson said the move would increase transparency and trading volumes in Dated Brent. The proposal came a mere fortnight after Shell’s adjustments to its trading contract for three North Sea blends including Brent.

The oil major said it would change its contract (SUKO 90) for buying and selling to introduce a premium for the delivery of higher quality Brent, Ekofisk and Oseberg grades. Previously, it only used the Forties grade which was typically the cheapest Brent blend and thus used to price the benchmark by default. BP has also agreed to Shell’s amended pricing proposals in principle.

The Oilholic thinks it is prudent to note that even though Platts is the primary provider of price information for North Sea crude(s), actual contracts such as Shell’s SUKO 90 are the industry’s own model. So in more ways than one, a broad alignment of the thinking of both parties (and BP) is a positive development. Platts is requesting industry feedback on the move by March 10 with changes being incorporated with effect from shipments in May.

However, there are some subtle differences. While Shell has proposed an inclusion of Brent, Platts is only suggesting premiums for Oseberg and Ekofisk grades. According to published information, the oil major, with BP’s approval, has proposed a 25% premium for Brent and Oseberg based on their difference to the Forties differential, and a 50% premium for Ekofisk.

But Platts, is seeking feedback on recommending a flat 50% premium for both Oseberg and Ekofisk. Nonetheless, at a time of a dip in North Sea production, a change of pricing status quo aimed at boosting liquidity ought to be welcomed. Furthermore, there is evidence of activity picking up in the UK sector of the North Sea, with Oil and Gas UK (OGUK), a body representing over 320 operators in the area, suggesting last month that investment was at a 30-year high.

OGUK said companies invested £11.4 billion in 2012 towards North Sea prospection and the figure is expected to rise to £13 billion this year. It credited UK Chancellor George Osborne’s new tax relief measures announced last year, which allowed gas fields in shallow waters to be exempt from a 32% tax on the first £500 million of income, as a key factor.

However, OGUK warned that reserves currently coming onstream have not been fully replaced with new discoveries. That is hardly surprising! In fact, UK production fell to the equivalent of 1.55 million barrels per day (bpd) in 2012, down by 14% from 2011 and 30% from 2010. While there may still be 24 billion barrels of oil to be found in the North Sea, the glory days are not coming back. Barrel burnt per barrel extracted or if you prefer Petropounds spent for prospection are only going to rise.

From the North Sea’s future, to the future of a North Sea operator – Canada’s Nexen – the acquisition of which by China’s state-owned CNOOC was finally approved on February 26. It took seven long months for the US$15.1 billion takeover to reach fruition pending regulatory approval in several jurisdictions, not least in Canada.

It was announced that shareholders of the Calgary, Alberta-based Nexen would get US$27.50 in cash for each share, but the conditions imposed by Canadian (and US) regulators for the deal to win approval were not disclosed. More importantly, the Harper administration said that CNOOC-Nexen was the last deal of its kind that the Canadian government would approve.

So it is doubtful that a state-controlled oil company would be taking another majority stake in the oil sands any time soon. The Nexen acquisition makes CNOOC a key operator in the North Sea, along with holdings in the Gulf of Mexico and West Africa, Middle East and of course Canada's Long Lake oil sands project (and others) in Alberta.

Meanwhile, Moody’s said the Aa3 ratings and stable outlooks of CNOOC Ltd and CNOOC Group will remain unchanged after the acquisition of Nexen. The agency would also continue to review for upgrade the Baa3 senior unsecured rating and Ba1 subordinated debt rating of Nexen.

Moving away from Nexen but sticking with the region, the country’s Canadian Business magazine asks, “Is Vancouver the new Calgary?”  (Er…we’re not talking about changing weather patterns here). The answer, in 'crude' terms, is a firm “Yes.” The Oilholic has been pondering over this for a good few years. This humble blogger’s research between 2010 and present day, both in Calgary and Vancouver, has always indicated a growing oil & gas sector presence in BC.

However, what is really astonishing is the pace of it all. Between the time that the Oilholic mulled about the issue last year and February 2013, Canadian Business journalist Blair McBride writes that five new oil & gas firms are already in Vancouver. Reliable anecdotal evidence from across the US border in general, and the great state of Texas in particular, suggests more are on their way! Chevron is a dead certain, ExxonMobil is likely to follow.

One thing is for certain, they’re going to need a lot more direct flights soon between Vancouver International and Houston’s George Bush Intercontinental airport other than the solitary Continental Airlines route. Hello, anyone from Air Canada reading this post?

Continuing with corporate news, Shell has announced the suspension of its offshore drilling programme in the Arctic for the rest of 2013 in order to give it time to “ensure the readiness of equipment and people.” It was widely expected that prospection in the Chukchi and Beaufort Seas off Alaska would be paused while the US Department of Justice is looking into safety failures.

Shell first obtained licences in 2005 to explore the Arctic Ocean off the Alaskan coastline. Since then, £3 billion has been spent with two exploratory wells completed during the short summer drilling season last year. However, it does not mask the fact that the initiative has been beset with problems including a recent fire on a rig.

Meanwhile, Repsol has announced the sale of its LNG assets for a total of US$6.7 billion to Shell. The deal includes Repsol’s minority stakes in Atlantic LNG (Trinidad & Tobago), Peru LNG and Bahia de Bizkaia Electricidad (BBE), as well as the LNG sale contracts and time charters with their associated loans and debt. It’s a positive for Repsol’s credit rating and Shell’s gas reserves.

As BP’s trial over the Gulf of Mexico oil spill began last month, Moody’s said the considerable financial uncertainty will continue to weigh on the company’s credit profile until the size of the ultimate potential financial liabilities arising from the April 2010 spill is known.

Away from the trial, the agency expects BP's cash flows to strengthen from 2014 onwards as the company begins to reap benefits of the large roster of upstream projects that it is working on, many of which are based in high-margin regions. “This would help strengthen the group's credit metrics relative to their weaker positioning expected in 2013,” Moody’s notes.

One final bit of corporate news, Vitol – the world's largest oil trading company –  has posted a 2% rise in its 2012 revenue to US$303 billion even though volumes traded fell and profit margins remained under pressure for much of the year. While not placing too much importance on the number, it must be noted that a US$300 billion-plus revenue is more than what Chevron managed and a first for the trading company.

However, it is more than safe to assume Chevron’s profits would be considerably higher than Vitol’s. Regrettably, other than relying on borderline gossip, the Oilholic cannot conduct a comparison via published sources. That’s because unlike listed oil majors like Chevron, private trading houses like Vitol don’t release their profit figures.

That’s all for the moment folks. But on a closing note, this blogger would like to flag-up research by the UK’s Nottingham Trent University which suggests that Libya could generate approximately five times the amount of energy from solar power than it currently produces in crude oil!

The university’s School of Architecture, Design and the Built Environment found that if the North African country – which is estimated to be 88% desert terrain – used 0.1% of its landmass to harness solar power, it could produce almost 7 million crude oil barrels worth of energy every day. Currently, Libya produces around 1.41 million bpd. Food for thought indeed! Keep reading, keep it ‘crude’!

To follow The Oilholic on Twitter click here.

© Gaurav Sharma 2013. Photo 1: Oil tanker, English Bay, BC, Canada. Photo 2: Downtown Vancouver, BC, Canada © Gaurav Sharma

Brent’s ‘nine-month high’, Aubrey, BP & more

Oh boy, what one round of positive data, especially from China, does to the oil market! The Brent forward month futures contract for March is within touching distance of a US$120 per barrel price and the bulls are out in force. Last Friday’s intraday price of US$119.17 was a nine-month high; a Brent price level last seen in May 2012. The cause – and you have heard this combination before – was healthy economic data from China, coupled with Syrian turmoil and an Iranian nuclear stalemate.

 

The Oilholic has said so before, and will say it again – the last two factors touted by market commentators have been broadly neutral in terms of their impact for the last six months. It is the relatively good macroeconomic news from China which is principally behind the rally that nearly saw the Brent price breach the US$120 level.

 

The bull-chatter is already in full force. In a note to clients, Goldman Sachs advised them last week to maintain a net long position in the S&P GSCI Brent Crude Total Return Index. The investment bank believes this rally is "less driven by supply shocks and instead by improving demand."

 

"Global oil demand has surprised to the upside in recent months, consistent with the pick-up in economic activity," the bank adds in an investment note. Really? This soon – on one set of data? One thing is for sure, with many Asian markets shut for the Chinese New Year, at least trading volumes will be lighter this week.

 

Nonetheless, the ‘nine-month high’ also crept into the headline inflation debate in the UK where the CPI rate has been flat at 2.7% since October, but commentators reckon the oil spike may nudge it higher. Additionally, the Brent-WTI spread is seen widening yet again towards the US$25 per barrel mark. On a related note, Enterprise Product Partners said that capacity on its Seaway pipeline to the US Gulf of Mexico coast from Cushing, Oklahoma will remain limited until much later this year.

 

Moving away from pricing, news arrived end-January that the inimitable Aubrey McClendon will soon vacate the office of the CEO of Chesapeake Energy. It followed intense scrutiny over the last nine months about revelations, which surfaced in May, regarding his borrowings to finance personal stakes in company wells.

 

As McClendon announced his departure on January 29, the company’s board reiterated that it had found no evidence to date of improper conduct by the CEO. McClendon will continue in his post until a successor is found which should be before April 1st – the day he is set to retire. The announcement marks a sad and unspectacular exit for the great pioneer who co-founded and led Chesapeake Energy from its 1989 inception in Oklahoma City and has been a colourful character in the oil and gas business ever since.

 

Whatever the circumstances of his exit may be, let us not forget that before the so called ‘shale gale’ was blowing, it was McClendon and his ilk who first put their faith in horizontal drilling and hydraulic fracturing. The rest, and US’ near self-sufficiency in gas supplies, is history.

Meanwhile, BP has been in the crude news for a number of reasons. First off, an additional US$34 billion in claims filed against BP by four US states earlier this month have provided yet another hurdle for the oil giant to overcome as it continues to address the aftermath of the 2010 Gulf of Mexico oil spill.

 

However, Fitch Ratings not believe that the new round of claims is a game changer. In fact the agency does not think that any final settlement is likely to be enough to interfere with BP's positive medium term credit trajectory. The latest claims come on top of the US$58 billion maximum liability calculated by Fitch. If realised, the cost of the spill could rise up to as much as US$92 billion.

 

The agency said the new claims should be put in the context of an asset sale programme that has raised US$38 billion. “This excludes an additional US$12 billion in cash to come from the sale of TNK-BP this year – upside in our analysis because we gave BP no benefit for the TNK-BP stake. BP had US$19 billion of cash on its balance sheet at 31 December 2012. That is after it has already paid US$38 billion in settlements or into escrow,” it added.

 

Away from the spill, the company announced that it had started production from new facilities at its Valhall field in the Norwegian sector of the North Sea on January 26 with an aim of producing up to 65,000 barrels of oil equivalent per day in the second half of 2013. Valhall's previous output averaged about 42,000 barrels per day (bpd), feeding crude into the Ekofisk oil stream.

 

Earlier this month, BP also said that both consortiums vying to link Azerbaijan's Shah Deniz gas field in the Caspian Sea, into Western European markets have an equal chance of success. BP operates the field which was developed in a consortium partnership with Statoil, Total, Azerbaijan’s Socar, LukAgip (an Eni, LUKoil joint venture) and others.

 

A decision, whether to pipe gas from the field into Austria via the proposed Nabucco (West) pipeline or into Italy through the rival Trans Adriatic Pipeline (TAP) project, is expected to be made by mid-2013. Speaking in Vienna, Al Cook, head of BP's Azeri operations, said, “I genuinely believe both pipelines at the moment have an equal chance. There's certainly no clear-cut answer at the moment.”

 

BP is aiming for the first gas from Shah Deniz II to be delivered to existing customer Turkey in 2018. Early 2019 is the more likely date for the first Azeri gas to reach Western Europe via this major development often touted as one which would reduce European dependence on Russia for its energy supplies.

 

The Shah Deniz consortium owns equity options in both the pipeline projects and Cook did not rule out that both Nabucco (West) and TAP could be built in the long term. Specifically, BP's own equity options, which are part of the Shah Deniz stakes, are pegged at 20% in TAP and 14% in Nabucco. Cook said BP was not “actively seeking” to increase its stake in either project – a wise choice indeed.

 

On February 4, BP said its Q4 2012 net profit, adjusted for non-operating items, currency and accounting effects, fell to US$3.98 billion from US$4.98 billion recorded over the corresponding quarter last year. Moving away from BP, Royal Dutch Shell posted a 6% dip in 2012 profits to US$27 billion on the back of weak oil and gas prices and lower exploration and production (E&P) margins.

 

The Anglo-Dutch oil major reported Q4 earnings of US$7.3 billion, a rise of 13%. However, on an adjusted current cost of supply basis and one-off asset sales, the profit came in at US$5.58 billion. In particular, Shell’s E&P business saw profits dip 14% to US$4.4 billion, notwithstanding an actual 3% increase in oil and gas production levels. However, the company did record stronger refining margins.

 

Ironically, while acknowledging stronger refining margins, Shell confirmed its decision to close most of its Harburg refinery units in Hamburg, Germany. The permanent shutdown of much of its 100,000 bpd refinery is expected next month in line with completing a deal made with Swedish refiner Nynas in 2011.

 

Finally, in a typical Italian muddle, several oil executives in the country are under investigation following a probe into alleged bribery offences related to the awarding of oil services contracts to Saipem in Algeria. Eni has a 43% stake in Saipem which is Europe’s biggest oil services provider. While the company itself denied wrongdoing, the probe was widened last Friday to include Eni CEO Paolo Scaroni.

 

The CEO’s home and office were searched as part of the probe. However, Eni is standing by their man and said it will cooperate fully with the prosecutor’s office in Milan. So far, Pietro Franco Tali (the CEO of Saipem) and Eni’s Chief Financial Officer Alessandro Bernini (who was Saipem’s CFO until 2008) have been the most high profile executives to step down in wake of the probe. Watch this crude space! That’s all for the moment folks! Keep reading, keep it ‘crude’!

 

To follow The Oilholic on Twitter click here.

 

© Gaurav Sharma 2013. Photo 1: Asian oil rig © Cairn Energy. Photo 2: Gas extraction site © Chesapeake Energy.

Crude talking points of the last two weeks

In a fortnight during which the Bank of England hired a man whose signature appears on Canadian banknotes as its new governor, the oil & gas world reiterated its own cross-border nature, when an American firm sold a Kazakh asset to an Indian company. That firm being ConocoPhillips, the asset being its 8.4% stake in Kazakh oil field Kashagan and the Indian buyer being national oil company (NOC) ONGC Videsh – all signed, sealed and delivered in a deal worth around US$5.5 billion.

 

Even with an after-tax impairment of US$400 million, the deal represents a tidy packet for ConocoPhillips as it attempts to cut its debt. Having divested its stake in Russia’s Lukoil, the American oil major has already beaten its asset sale programme target of US$20 billion. So when the final announcement came, it was not much of a surprise as Kazakhstan government officials had revealed much earlier that a move was on the cards.

 

Still it is sobering to see ConocoPhillips divest from Kashagan – the world's biggest oilfield discovery by volume since 1968. It may hold an estimated 30 billion barrels of oil. Phase I of the development, set to begin next year, could yield around 8 billion barrels, a share of which ONGC is keenly eyeing.

India imports over 75% of the crude oil it craves and is in fact the world's fourth-biggest oil importer by volume. Given this dynamic, capital expenditure on asset with a slower turnaround may not be an immediate concern for an Indian NOC, but certainly is for investors in the likes of ConocoPhillips and its European peers.

On the back of a series of meetings between investors and its EMEA natural resources & commodities team in London, Fitch Ratings recently revealed that elongated upstream investment lead times and a (still) weak refining environment in Western Europe remain a cash flow concern for investors.

 

They seemed most concerned about the lead time between higher upstream capex and eventual cash flow generation and were worried about downward rating pressure if financial metrics become strained for an extended period. It is prudent to mention that Fitch Ratings views EMEA oil & gas companies' capex programmes as measured and rational despite a sector wide revised focus on upstream investment.

 

For example, the two big beasts – BP and Royal Dutch Shell – are rated 'A'/Positive and 'AA'/Stable respectively; both have increased capex by more than one-third for the first 9 months of 2012 compared to the same period last year. Elsewhere in their chats, unsurprisingly Fitch found that refining overcapacity and weak utilisation rates remain a concern for investors in the European refining sector. Geopolitical risk is also on investors' minds as they look to 2013.

 

While geopolitical events may drive oil prices up, which positively impact cash flow, interruptions to shipping volumes may more than offset gains from these price increases – negatively impacting both operating cash flow and companies' competitive market positions. Away from capex concerns, Fitch also said that shale gas production in Poland could improve the country's security of gas supplies but is unlikely to lead to large declines in gas prices before 2020.

In a report published on November 26, Arkadiusz Wicik, Fitch’s Warsaw-based director and one of the most pragmatic commentators the Oilholic has encountered, noted that shale gas production in Poland, which has one of the highest shale development potentials in Europe, would lower the country's dependence on gas imports. Most of Poland's imports currently come from Russia.

 

However, Wicik candidly noted that even substantial shale gas production by 2020, is unlikely to result in large declines in domestic gas prices.

 

"In the most likely scenario, shale gas production, which may start around 2015, will not lead to a gas oversupply in the first few years of production, especially as domestic gas demand may increase by 2020 as several gas-fired power plants are planned to be built. If there is a surplus of gas because shale gas production reaches a significant level by 2020, this surplus is likely to be exported," he added.

 

In actual fact, if the planned liberalisation of the Polish gas market takes place in the next few years, European spot gas prices may have a larger impact on gas prices in Poland than the potential shale gas output.

 

From a credit perspective, Fitch views shale gas exploration as high risk and capital intensive. Meanwhile, the UK government was forced on the defensive when a report in The Independent newspaper claimed that it was opening up 60% of the country’s cherished countryside for fracking.

 

Responding to the report, a government spokesperson said, "There is a big difference between the amount of shale gas that might exist and what can be technically and commercially extracted. It is too early to assess the potential for shale gas but the suggestion more than 60% of the UK countryside could be exploited is nonsense."

 

"We have commissioned the British Geological Survey to do an assessment of the UK's shale gas resources, which will report its findings next year," he added.

 

Barely had The Independent revealed this ‘hot’ news, around 300 people held an 'anti-fracking' protest in London. Wow, that many ‘eh!? In defence of the anti-frackers, it is rather cold these days in London to be hollering outside Parliament.

 

Moving on to the price of the crude stuff, Moody’s reckons a constrained US market will result in a US$15 per barrel difference in 2013 between the two benchmarks – Brent and WTI – with an expected premium in favour of the former. Its recently revised price assumptions state that Brent crude will sell for an average US$$100 per barrel in 2013, US$95 in 2014 and US$90 in the medium term, beyond 2014. While the price assumption for Brent beyond 2014 is unchanged, the agency has revised both the 2013 and 2014 assumptions.

 

For WTI, Moody’s has left its previous assumptions unchanged at US$85 in 2013, 2014 and thereafter. Such a sentiment ties-in to the Oilholic’s anecdotal evidence from the US and what many in City concur with. So Moody’s is not alone in saying that Brent’s premium to WTI is not going anywhere, anytime soon. Even if the Chinese economy tanks, it’ll still persist in some form as both benchmarks will plummet relative to market conditions but won’t narrow up their difference below double figures.

 

Finally, on the noteworthy corporate news front, aside from ConocoPhillips’ move, BP was in the headlines again for a number of reasons. Reuters’ resident Oilholic Tom Bergin reported in an exclusive that BP is planning a reorganisation of its exploration and production (E&P) operations. Citing sources close to the move, Bergin wrote that Lamar McKay, currently head of BP's US operations, will become head of a new E&P unit; a reinstatement of a role that was abolished in 2010 in the wake of the oil spill.

 

Current boss Bob Dudley split BP's old E&P division into three units on his elevation to CEO to replace Tony Hayward, whose gaffes in during the Gulf of Mexico oil spill led to his stepping down. BP declined to comment on Bergin’s story but few days later provided an unrelated newsworthy snippet.

 

The oil giant said it had held preliminary talks with the Russian government and stakeholders in the Nordstream pipeline about extending the line to deliver gas to the UK. BP said any potential extension to the pipeline was unlikely to be agreed before mid-2013.

 

The pipeline’s Phase I, which is onstream, runs under the Baltic Sea bringing Russian gas into Germany. A source described the move as “serious” and aimed at diversifying the UK’s pool of gas supplying nations which currently include Norway and Qatar as North Sea production continues to wane. As if that was not enough news from BP for one fortnight, the US government decided to "temporarily" ban the company from bagging any new US government contracts.

 

The country's Environmental Protection Agency (EPA) said on November 28 that the move was standard practice when a company reaches an agreement to plead guilty to criminal charges as BP did earlier in the month. New US E&P licences are made available regularly, so BP may miss out on some opportunities while the ban is in place but any impact is likely to be relatively ephemeral at worst. No panic needed!

 

On a closing note, in a move widely cheered by supply side industry observers, Shell lifted its force majeure on Nigeria's benchmark Bonny Light crude oil exports on November 21 easing supply problems for Africa’s leading oil producer. The force majeure, implying a failure to meet contractual obligations due to events outside of corporate control, on Bonny Light exports came into place on October 19 following a fire on a ship being used to steal oil. It forced the company to shut down its Bomu-Bonny pipeline and defer 150,000 barrels per day of production.

 

However, Shell said that force majeure on Nigerian Forcados crude exports remains in place. Forcados production was also stopped owing to damage caused by suspected thieves tapping into the Trans Forcados Pipeline and the Brass Creek trunkline. As they say in Nigeria - it’s all ok until the next attempted theft goes awry. That’s all for the moment folks! Keep reading, keep it 'crude'!

 

© Gaurav Sharma 2012. Photo: Oil Rig, USA © Shell

Market chatter, luck of the Irish & East Timor

Rather than a daily assessment, the Oilholic often looks at how the forward month price of leading crude oil benchmarks fluctuates on a weekly basis. Such an exercise regularly provides interesting tangents for a discussion at the beginning of the week. Last Monday all three benchmarks – Brent, WTI and OPEC’s basket of crude – were in the red in week over week terms. This Monday, all three are in the green rising roughly between 2% and 3%. There is a clear reason for the upside momentum with Brent holding firm above US$114 per barrel and the WTI above US$90.

 

Better than expected Chinese economic data is largely behind the current market sentiment (see graphic above, click to enlarge). But as yours truly fast loses count of how many ‘critical’ EU summits we have recently had, another one is due towards the end of the week. So market caution will prevail either side of the pond. For Sucden Financial analyst Myrto Sokou, the two-day summit (this Thursday and Friday) and the regional Spanish elections (Galicia and Basque) will be the main focus for the week.

 

“We are not expecting any decision yet on Spain’s issues, with Reuters again suggesting that bundling multiple bailouts in one package is preferable, especially for Bundestag approval. Again the usual flow of Greek rumours, with some suggesting that the country needs two more years to implement reforms,” she added.

 

US EIA data released last Friday noted that American crude oil stocks built by 1.7 million barrels driven by a 193,000 barrels per day (bpd) increase in supply. This came from an import rise of 115,000 bpd and a domestic output rise of 78,000 bpd (to 6.598 million bpd). Concurrently, US refinery runs declined by 97,000 bpd, in line with the maintenance season and Cushing, Oklahoma stocks slightly gained by 0.3 million barrels (and are still comfortably above five year highs).

 

Société Générale analyst Mike Wittner felt the report indicated a typical pattern for a refinery maintenance season. “We see a very bullish backdrop for products and a bearish trend for crude…However, all products' fundamentals were very weak - both supply and demand. Recent positive US macroeconomic data might improve demand and add an upward pressure on prices,” he concluded.

 

Moving away from the price of the crude stuff, confirmation finally came that the Irish are about to hit black gold in meaningful quantities after many false dawns. This may largely be attributed to Providence Resources, a Dublin and London AiM dual-listed company, which first caught the Oilholic’s eye back in May.

 

The company’s chief executive Tony O’Reilly confirmed last week that its Barryroe site, 30 miles off the Cork coast, could potentially yield 280 million barrels of oil. He told the BBC that with Brent crude above US$100 per barrel at moment, the prospection offered a “lot of value” and would mark the beginning of the Irish oil industry.

 

While rules related to licensing, taxation and local job facilitation would still need to be worked on, what is transpiring at Providence is by all accounts a pivotal moment. "We hope there is a renaissance of interest by international companies who need to come to Ireland and help us to exploit our natural resources. We cannot do it alone," O’Reilly added.

 

ExxonMobil has already obliged by opting to explore a Providence site at Drumquin. Many others would surely follow given number of exploration licences the company currently holds according to its 2011 Annual report (see map of Providence Resources' licences above right, click to enlarge). Crossing over to the other side of the planet, East Timor or Timor Leste has created its domestic Institute of Petroleum and Geology (IPG) by means of its Decree-Law 33/2012 of July 18, 2012.

 

The new institute will be entrusted with archiving, producing, managing, storing and disseminating geological data, including that related to onshore and offshore oil, gas and mineral resources. Miranda Law Firm, which operates in the once strife ravaged jurisdiction, said the data collected and managed by IPG will provide the basis and impetus for domestic prospecting, exploration and production.

 

The problem is not so much of data collection hindering offshore prospection but one of defining East Timor’s maritime boundaries. It only became an independent state in May 2002. The new nation did not accept the Timor Gap Treaty of 1989, which divided the country’s resources between Australia and Indonesia. It was signed over a decade after Indonesia invaded East Timor in 1976 which had formerly been a Portuguese colonial outpost.

 

A new agreement – the Timor Sea Treaty of 2002 – then proposed a Joint Petroleum Development Area (JPDA) with a 90:10 oil & gas revenue share of new finds between East Timor and Australia. Then perhaps much to the chagrin of locals, Greater Sunrise Gas field – considered one of the most promising finds in the region – saw only a fifth of its nautical area within JPDA confines. As a consequence, only 18% of generated revenue currently falls in East Timor's lap according to sources in the Australian media. All the Oilholic can say is that if you need a crude talking point – talk East Timor.

 

Moving on from one post-conflict area to another supposedly post-conflict region – the Niger Delta – where Shell rejected the liability claims by four Nigerian farmers. At a civil court in The Hague, they have accused the Anglo-Dutch oil major of ruining their livelihood and causing damage to their land on account of oil spills. Shell for its part blamed sabotage and criminal theft by locals for the damage.

 

In a statement it said, "The real tragedy of the Niger Delta is the widespread and continual criminal activity, including sabotage, theft and illegal refining, that causes the vast majority of oil spills. It is this criminality which all organisations with an interest in Nigeria's future should focus their efforts on highlighting and addressing."

 

Opinion might well be divided, but this is the first instance of a half-Dutch multinational being taken to a civil court for an alleged offence caused outside the Netherlands. The only local connection is the Dutch arm of environmental group Friends of the Earth which is backing the four Nigerian farmers. While this landmark case is far from reaching its conclusion, if it has piqued your interest then Michael Peel’s brilliant book A Swamp Full of Dollars could give you all the background to the spills, the violence, the destruction and the crude world of Nigerian oil.

 

Finally, from the serious to the farcical – an episode was brought to the Oilholic’s attention by a colleague at industry scouting data and technical information provider Drillinginfo.  It seems Hollywood megastar Matt Damon’s latest foray – The Promised Land – widely touted as an anti-fracking response to US shale exploration is part bankrolled or rather will be brought to our screens “in association with” Image Media Abu Dhabi, a subsidiary of Abu Dhabi Media, according to the preview’s list of credits.

 

The media company is wholly owned by the government of UAE; an OPEC member country and one from which the US is hoping to cut its crude imports from based on the prospects of domestic shale exploration! It is best to leave it to you folks to draw your own conclusions, but that’s all for the moment! Keep reading, keep it ‘crude’!

 

© Gaurav Sharma 2012. Graphic 1: Forward month crude oil price © Sucden Financial, October 2012. Graphic 2: Providence Resources’ existing licences © Providence Resources Plc, December 2011

Non-OPEC supply, volatility & other matters

One of the big beasts of the non-OPEC supply jungle – Russia – held its latest high level meeting with OPEC earlier this week. Along with the customary niceties came the expected soundbites when Alexander Novak, Minister of Energy of the Russian Federation and Abdalla Salem El-Badri, OPEC Secretary General, met in Vienna on Tuesday.

 

Both men accompanied by “high-level” delegations exchanged views on the current oil market situation and “underscored the importance of stable and predictable markets for the long term health of the industry and investments, and above all, the wellbeing of the global economy.”

 

OPEC is also eyeing Russia’s Presidency of the G-20 in 2013 where the cartel has only one representative on the table in the shape of Saudi Arabia, which quite frankly represents itself rather than the block. However, non-OPEC suppliers are aplenty – Canada, Brazil, Mexico and USA to name the major ones alongside the Russians. The Brits and Aussies have a fair few hydrocarbons to share too.

 

Perhaps in light of that, OPEC and Russia have proposed to broaden their cooperation and discuss the possible establishment of a joint working group focused on information exchange and analysis of the petroleum industry. The two parties will next meet in the second quarter of 2013 by which time, unless there is a geopolitical flare-up or a massive turnaround in the global economy, most believe healthy non-OPEC supply growth would have actually been offset by OPEC cuts.

 

So the Oilholic thinks there’s quite possibly more to the meeting on September 25 than meets the eye…er…press communiqué. Besides, whom are we kidding regarding non-OPEC participants? Market conjecture is that non-OPEC supply growth itself is likely to be moderate at best given the wider macroeconomic climate.

 

Mike Wittner, global head of oil research at Société Générale, notes that non-OPEC supply growth is led by rapid gains in North America: tight oil from shale in the US and oil sands and bitumen in Canada. North American supply is forecast to grow by 1.04 million barrels per day (bpd) in 2012 and 0.75 million bpd in 2013. The reason for the overall higher level of non-OPEC growth next year, compared to 2012, is that this year’s contraction in Syria, Yemen, and South Sudan has  already taken place and will not be repeated.

 

“We are projecting output in Syria and Yemen flat through 2013, with disruptions continuing; we are forecasting only small increases in South Sudan beginning well into next year, as the recent pipeline agreement with Sudan appears quite tenuous at this point. With non-OPEC supply growth roughly the same as global demand growth next year, OPEC will have to cut crude production to balance the market,” he added.

 

With more than anecdotal evidence of the Saudis already trimming production, Société Générale reckons total non-OPEC supply plus OPEC NGLs production may increase by 0.93 million bpd in 2013, compared to 0.75 million bpd in 2012. Compared to their previous forecast, non-OPEC supply plus OPEC NGLs growth has been revised up by 50,000 bpd in 2012 and down by 60,000 bpd in 2013. That’s moderate alright!

 

The key point, according to Wittner, is that the Saudis did not replace the last increment of Iranian flow reductions, where output fell by 300 kb/d from May to July, due to EU and US sanctions. “The intentional lack of Saudi replacement volumes was – in effect – a Saudi cut; or, if one prefers, it was the Saudis allowing Iran to unintentionally and unwillingly help out the rest of OPEC by cutting production and exports,” he concluded.

 

Let’s see what emerges in Vienna at the December meeting of ministers, but OPEC crude production is unlikely to average above 31.5 million bpd in the third quarter of 2012 and is likely to be cut further as market fundamentals remain decidedly bearish. In fact, were it not for the geopolitical premium provided by Iran’s shenanigans and talk of a Chinese stimulus, the heavy losses on Wednesday would have been heavier still and Brent would not have finished the day remaining above the US$110 per barrel mark.

 

On a related note, at one point Brent's premium to WTI increased to US$20.06 per barrel based on November settlements; the first move above the US$20-mark since August 16. As a footnote on the subject of premiums, Bloomberg reports that Bakken crude weakened to the smallest premium over WTI oil in three weeks as Enbridge apportioned deliveries on pipelines in the region in Tuesday’s trading.

 

The Western Canadian Select, Canada’s most common benchmark, also usually sells at a discount to the WTI. But rather than the “double-discount” (factoring in WTI’s discount to Brent) being something to worry about, National Post columnist Jameson Berkow writes how it can be turned into an advantage!

 

But back to Europe where Myrto Sokou, analyst at Sucden Financial Research, feels that very volatile and nervous trading sessions are set to continue as Eurozone‘s concerns weigh on market sentiment. “The rebound on Thursday morning followed growing discussions of a further stimulus package from China that improved market sentiment and increased risk appetite,” she said.

 

However, Sokou sees the market remaining focussed on Spain as news of its first draft budget for 2013 is factored in. “It is quite a crucial time for the markets, especially following the recent refusal from Germany, Holland and Finland to allow ESM funds to cover legacy assets, so that leaves the Spanish Government to fund their Banks,” she added.

 

On the corporate front, Canadians find themselves grappling with the Nexen question as public sentiment is turning against CNOOC’s offer for the company just as its shareholders approved the deal. Many Members of Parliament have also voiced their concerns against a deal with the Chinese NOC. For its part, if a Dow Jones report is to be believed, CNOOC is raising US$6 billion via a one-year term loan to help fund the possible purchase of Nexen. The Harper administration is yet to give its regulatory approval.

 

Meanwhile, the Indian Government has confirmed that one of its NOCs – ONGC Videsh – has made a bid to acquire stakes in Canadian oil sands assets owned by ConocoPhillips with a total projected market valuation of US$5 billion. ConocoPhillips aims to sell about 50% of its stake in emerging oil sands assets, according to news reports in Canada. Looks like one non-OPEC destination just won’t stop grabbing the headlines!

 

Moving away from Canada, Thailand’s state oil company PTTEP has finalised arrangements for its US$3.1 billion share offer for Mozambique’s Cove Energy. Earlier this year, PTTEP won a protracted takeover battle for Cove over Shell. Concluding on a lighter note, the Oilholic has learned that the Scottish distillery of Tullibardine is to become the first whisky distillery in the world to have its by-products converted into advanced biofuel, capable of powering vehicles fuelled by petrol or diesel.

 

The independent malt whisky producer in Blackford, Perthshire has signed a memorandum of understanding with Celtic Renewables Ltd, an Edinburgh-based company which has developed the technology to produce biobutanol from the by-products of whisky production. Now that’s worth drinking to, but it’s all for the moment folks! Keep reading, keep it ‘crude’!

 

© Gaurav Sharma 2012. Oil Drilling site, North Dakota, USA © Phil Schermeister / National Geographic.

Brent & the ‘crude’ fortnight to Friday the 13th!

Despite crude economic headwinds, the Brent forward month futures price spiked back well above US$100 per barrel on July 3. No one was convinced it’d stay there and so it proved to be barely a week later. Since then it has lurked around the US$100 mark. Our crude friends in the trading community always like to flag up supply shocks – some real some and some perceived along with some profit taking thrown in the mix.

The Norwegian oil industry strike which began on June 24 was a very real threat to supply. When oil industry workers down tools in a country which is the world’s fifth largest exporter of the crude stuff, then alarm bells ought to ring and so they did. Being a waterborne crude benchmark, Brent was always likely to be susceptible to one of its main production sources. The Louisiana Light’s fluctuation over the hurricane season stateside would be a fair analogy for the way Brent responded to the news of the strike.

Quite frankly, forget the benchmark; the strike saw Norwegian oil production dip by 13% and its gas output by 4% over the 16 days that it lasted. So when a Reuters report came in that Norway's government had used emergency powers to step in and force offshore oil and gas workers back to work, more than the bulls eased off.

The dispute, which is by no means over, concerns offshore workers' demand for the right to retire early, at 62, with a full pension. The row revolves around the elimination of a pension add-on introduced in 1998 for workers who retire (at 62), five years ahead of Norway's official retirement age and three years ahead of the general age for oil workers.

Accompanying a very real supply shock in the shape of the Norwegian strike were empty threats from Iran to close the Strait of Hormuz in wake of the EU sanctions squeeze. Traders put two and two together and perhaps came-up with 22 out of a sense of mischief.

First of all, the Iranians would be mighty silly if they decided to close the Strait of Hormuz with the US Fifth fleet lurking around. It just would not work and Iran would hurt itself more for the sake of what would at best be a temporary disruption. Secondly, City estimates, for instance the latest one being put out by Capital Economics, suggest that the US and EU sanctions could ultimately reduce oil exports from Iran by as much as 1.5 million barrels per day (bpd).

While it is serious stuff for Iran, the figure is less than 2% of global supply. As such hardly anyone in the City expects the implementation of sanctions on Iran to be a game-changer from a pricing standpoint.

“We maintain our view that the imminent tightening of Western sanctions on Iran is unlikely to have anywhere near as large an impact on global oil prices as many had feared. Demand is weakening and other suppliers are both able and willing to meet any shortfall. Admittedly, much could still depend on how the Iranian regime chooses to respond,” said Julian Jessop of Capital Economics.

Causative effect of such a market sentiment predictably sees Brent back in US$90s to lower US$100 range. In fact Capital Economics, Société Générale, Moody’s and many other forecasters have a US$70-100 per barrel forecast for Brent for the remainder of the year.

A spokesperson for Moody’s told the Oilholic that the agency has lowered its crude price assumptions to US$100/barrel for Brent and US$90/barrel for WTI in 2012, with an additional expected decline to US$95/barrel for Brent and US$85/barrel for WTI in 2013.

Moody's also expects that the spread between benchmark Brent and WTI crude will narrow to about US$5 in 2014. In a report, the agency adds that a drop in oil prices and jitters over economic conditions in Europe, the US and China suggest the global exploration and production sector (E&P) will see its earnings grow more slowly over the next 12 to 18 months.

As such, Moody's expects E&P industry EBITDA to grow in the mid-to-high single digits year on year through mid-2013. Expectations for EBITDA growth in the sector above 10% would suggest a positive outlook, while a retreat of 10% or more would point to a negative outlook. Moody's changed its outlook for the E&P industry to stable from positive on June 27, 2012.

The agency also expects little change in US natural gas prices before the end of 2013 with a normal winter offering the best near-term support for natural gas prices as increased utility and industrial demand will ramp up slowly.

On the corporate front, in an interesting fortnight Origin Energy announced that the Australia Pacific LNG project (APLNG) – in which its stake is at 37.5% after completion of Sinopec's additional equity subscription – has received board approval for Final Investment Decision (FID) for the development of a second LNG train.

The expanded two-train project is expected to cost US$20 billion for a coal seam gas (CSG) to liquefied natural gas (LNG) project in Queensland, Australia. Elsewhere, India’s Essar Energy subsidiary Essar E&P Ltd is to sell a 50% stake in Vietnam's offshore gas exploration block 114 to Italy’s ENI.

Under the terms of the transaction, which is still subject to approval from the Vietnamese government, ENI is also assuming operator status for the block. Yours truly guesses the Indian company finally decided it was time to indulge in a bit of risk diversification.

Continuing with corporate stuff, the Oilholic told you BP’s planned divestment in TNK-BP won’t come about that easily or smoothly. One of its oligarch partners - Mikhail Fridman - has alleged that there are no credible buyers for BP’s 50% stake in the dispute ridden Russian venture.

In an interview with the Wall Street Journal on June 29, Fridman said, "We doubt it has any basis in fact. They are trying to buy time, to reassure investors."

However, BP said it stood by its announcement. It also announced an agreement to sell its interests in the Alba and Britannia fields in the British sector of the North Sea to Mitsui for US$280 million. The sale includes BP’s non-operating 13.3% stake in Alba and 8.97% stake in Britannia. Completion of the deal is anticipated by the end of Q3 2012, subject to UK regulatory approvals.

Net production from the two fields averages around 7,000 barrels of oil equivalent per day. It is yet another example of BP’s smart management of its asset portfolio in wake of Macondo as the company refocuses on pastures and businesses new.

Elsewhere in the North Sea, Dana Petroleum expects to start drilling at two new oil fields off Shetland named - Harris and Barra – by Q2 2013. The first crude consignment from what’s described as the Western Isles project will come onstream in 2015. A spokesperson said field production could run for 15 years.

The region needs all the barrels it can pull as the UK’s budgetary watchdog – the Office for Budget Responsibility (OBR) – has projected that future oil and gas revenues from the North Sea may be much lower than previous forecasts.

OBR sees the Brent prices rise from US$95/barrel in 2016 to US$173/barrel in 2040. “This compares lower with a projection in our assessment last year of a rise from US$107/barrel in 2015, rising to US$206/barrel in 2040," a spokesperson said.

As a result the OBR now projects tax receipts will be about 0.05% of GDP by 2040-41; half the level it projected in last year. It identified lower projected oil and gas prices as the key driver for the reduced figures given this year. The Oilholic won’t be called upon to vote on Scottish independence; but if yours truly was a Scottish Nationalist then there’d be a lot to worry about.

Finally, it looks like UK regulator – the Takeover Panel – has had enough of the protracted battle for the takeover of Cove Energy between Royal Dutch Shell and Thailand's PTTEP. It has given both parties a deadline of July 16 to make their final offers.

The Takeover Panel announced on Friday 13, July 2012 that if no offer is accepted by the said date, the sale of Cove will be decided by an auction on July 17. It could be lucky for neither, if they pay over the odds. That’s all for the moment folks. Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo: North Sea oil rig © Cairn Energy.

Charting the love-hate relationship with big oil

If the oil companies had answers to the energy crisis, and in some cases maybe they do, would you believe them? Given that most of us grow up loathing big oil for a multitude of reasons ranging from environmental to monetary ones while filling up the gas tank, all thoughts put forward by energy companies become suspect.

Or as the author of the book – Why we hate the oil companies? Straight talk from an energy insider – asks, would you accept the fox’s plan for the hen coop? Written by none other than John Hofmeister, the former president of Shell, it examines what’s behind the energy companies' swagger or perceived swagger.

Having made the transition from being a mere consumer of gasoline to the president of a major oil company, Hofmeister attempts to feel the pulse of public sentiment which ranges from indifference to pure hatred of those who produce the crude stuff. Spread over 270 pages split by 14 chapters, this book does its best to offer a reasonably convincing insider’s account of the industry.

Along the way it dwells on how politicians and special interest groups use energy misinformation and disinformation to meet their own odds and ends in a high stakes game. Hofmeister founded the US Citizens for Affordable Energy; an American grassroots campaign aimed changing the way the US looks at energy and energy security.

So this book benefits from his thoughts on solving energy issues, offering targeted solutions on affordable and clean energy, environmental protection and sustained economic competitiveness. The tone is a surprisingly frank one and research is solid. It is also no corporate waffle from an oilman lest sceptics dismiss it as such without reading it.

The Oilholic believes it even throws up some pragmatic solutions which appear sound at least on paper. So while there is little not to like about the book, there is one glaring caveat. It is just way too American in its scope. Yours truly is happy to recommend this book to our friends across the pond in North America; but readers elsewhere while appreciating the narrative, may come to the same conclusion.

© Gaurav Sharma 2012. Photo: Front Cover – Why we hate the oil companies? Straight talk from an energy insider © Palgrave Macmillan

UK & Norway: A ‘crudely’ special relationship

Unconnected to the current systemic financial malaise in Europe, a recent visit to Oslo by British Prime Minister David Cameron for a meeting with his Norwegian counterpart Jens Stoltenberg went largely unnoticed. However, its ‘crude’ significance cannot be understated and Cameron’s visit was the first by a British Prime Minister since Margaret Thatcher’s in 1986.

Beaming before the cameras, Stoltenberg and Cameron announced an "energy partnership" encompassing oil, gas and renewable energy production. As production from established wells has peaked in the Norwegian and British sectors of the North Sea, a lot has changed since 1986. The two principal proponents of exploration in the area are now prospecting in hostile climes of the hitherto unexplored far North – beyond Shetland Islands and in the Barents Sea.

Reading between PR lines, the crux of what emerged from Oslo last week is that both governments want to make it easier for firms to raise money for projects and to develop new technologies bearing potential benefits in terms of energy security. That Cameron is the first British PM to visit Norway in decades also comes as no surprise in wake of media reports that the Norwegian sector of the North Sea is witnessing a second renaissance. So of the growing amount of oil the UK imports since its own production peaked in 1999 – Norway accounts for over 60% of it. The percentage for British gas imports from Norway is nearly the same.

"I hope that my visit to Oslo will help secure affordable energy supplies for decades to come and enhance investment between our two countries. This will mean more collaboration on affordable long-term gas supply, more reciprocal investment in oil, gas and renewable energies and more commercial deals creating thousands of new jobs and adding billions to our economies," Cameron said.

For their part the Norwegians, who export over five times as much energy as they use domestically, told their guest that they see the UK as a reliable energy partner. We hear you sir(s)!

Meanwhile, UK Office for National Statistics’ (ONS) latest production data released this morning shows that extractive industries output fell by 15% on an annualised basis in April with oil & gas production accounting for a sizeable chunk of the decline.

A further break-up of data suggests oil & gas production came in 18.2% lower in April 2012 when compared with the recorded data for April 2011. Statisticians say production would have been higher in April had it not been for the shutdown of Total’s Elgin platform in the North Sea because of a gas leak.

Elsewhere, farcical scenes ensued at the country’s Manchester airport where the airport authority ran out of aviation fuel causing delays and flight cancellations for hours before supplies were restored. Everyone in the UK is asking the same question – how on earth could this happen? Here’s the BBC’s attempt to answer it.

Finally the Oilholic has found time and information to be in a position to re-examine the feisty tussle for Cove Energy. After Shell’s rather mundane attempt to match Thai company PTTEP’s offer for Cove, the Thais upped the stakes late last month with a £1.22 billion takeover offer for the Mozambique-focused oil & gas offshore company.

PTTEP’s 240 pence/share offer improves upon its last offer of 220 pence or £1.12 billion in valuation which Shell had matched to nods of approval from Cove’s board and the Government of Mozambique. The tussle has been going on since February when Shell first came up with a 195 pence/share offer which PTTEP then bettered.

Yours truly believes Cove’s recommendation to shareholders in favour of PTTEP’s latest offer does not guarantee that the tussle is over. After all, Cove recommended Shell’s last offer too which even had a break clause attached. Chris Searle, corporate finance partner at accountants BDO, feels the tussle for control may end up with someone overpaying.

“I’m not surprised that PTTEP have come back in for Cove since the latter’s gas assets are so attractive. Of course the danger is that we now get into a really competitive auction that in the end will lead to one of the bidders overpaying. It will be interesting to see how far this goes and who blinks first,” he concludes.

Cove’s main asset is an 8.5% stake in the Rovuma Offshore Area 1 off the coast of Mozambique where Anadarko projects recoverable reserves of 30 tcf of natural gas. Someone just might end-up overpaying.

On the pricing front, instead of the Spanish rescue calming the markets, a fresh round of volatility has taken hold. One colleague in the City wonders whether it had actually ever left as confusion prevails over what messages to take from the new development. Instead of the positivity lasting, Spain's benchmark 10-year bond yields rose to 6.65% and Italy's 10-year bond yield rose to 6.19%, not seen since May and January respectively.

Last time yours truly checked, Brent forward month futures contract was resisting US$97 while WTI was resisting US$82. That’s all for the moment folks! The Oilholic is off to Vienna for the 161st OPEC meeting of ministers. More from Austria soon; keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo: Oil Rig in the North Sea © Royal Dutch Shell.

BP to call time on 9 years of Russian pain & gain?

After market murmurs came the announcement this morning that BP is looking to sell its stake in Russian joint venture TNK-BP; a source of nine years of corporate pain and gain. As the oil major refocuses its priorities elsewhere, finally the pain aspect has made BP call time on the venture as it moves on.

A sale is by no means imminent but a company statement says, it has “received unsolicited indications of interest regarding the potential acquisition of its shareholding in TNK-BP.”

BP has since informed its Russian partners Alfa Access Renova (AAR), a group of Russian billionaire oligarchs fronted by Mikhail Fridman that it intends to pursue the sale in keeping with “its commitment to maximising shareholder value.”

Neither the announcement itself nor that it came over Q2 2012 are a surprise. BP has unquestionably reaped dividends from the partnership which went on to become Russia’s third largest oil producer collating the assets of Fridman and his crew and BP Russia. However, it has also been the source of management debacles, fiascos and politically motivated tiffs as the partners struggled to get along.

Two significant events colour public perception about the venture. When Bob Dudley (current Chief executive of BP) was Chief executive of TNK-BP from 2003-2008, the Russian venture’s output rose 33% to 1.6 million barrels per day. However for all of this, acrimony ensued between BP and AAR which triggered some good old fashioned Russian political interference. In 2008, BP’s technical staff were barred from entering Russia, offices were raided and boardroom arguments with political connotations became the norm.

Then Dudley’s visa to stay in the country was not renewed prompting him to leave in a huff claiming "sustained harassment" from Russian authorities. Fast forward to 2011 and you get the second incident when Fridman and the oligarchs all but scuppered BP’s chances of joining hands with state-owned Rosneft. The Russian state behemoth subsequently lost patience and went along a different route with ExxonMobil leaving stumped faces at BP and perhaps a whole lot of soul searching.

In wake of Macondo, as Dudley and BP refocus on repairing the company’s image in the US and ventures take-off elsewhere from Canada to the Caribbean – it is indeed time to for the partners to apply for a divorce. In truth, BP never really came back from Russia with love and the oligarchs say they have "lost faith in BP as a partner". Fridman has stepped down as TNK-BP chairman and two others Victor Vekselberg and Leonard Blavatnik also seem to have had enough according to a contact in Moscow.

The Oilholic’s Russian friends reliably inform him that holy matrimony in the country can be annulled in a matter of hours. But whether this corporate divorce will be not be messy via a swift stake sale and no political interference remains to be seen. Sadly, it is also a telling indictment of the way foreign direct investment goes in Russia which is seeing a decline in production and badly needs fresh investment and ideas.

Both BP and Shell, courtesy its frustrations with Sakhalin project back in 2006, cannot attest to Russia being a corporate experience they’ll treasure. The market certainly thinks BP’s announcement is for the better with the company’s shares trading up 2.7% (having reached 4% at one point) when the Oilholic last checked.

From BP to the North Sea, where EnQuest – the largest independent oil producer in the UK sector – will farm out a 35% interest in its Alma and Galia oil field developments to the Kuwait Foreign Petroleum Exploration Company (KUFPEC) subject to regulatory approval. According to sources at law firm Clyde & Co., who are acting as advisers to KUFPEC, the Kuwaitis are to invest a total of approximately US$500 million in cash comprising of up to US$182 million in future contributions for past costs and a development carry for EnQuest, and of KUFPEC's direct share of the development costs.

Away from deals and on to pricing, Brent dropped under US$100 for the first time since October while WTI was also at its lowest since October on the back of less than flattering economic data from the US, India and China along with ongoing bearish sentiments courtesy the Eurozone crisis. In this crudely volatile world, today’s trading makes the thoughts expressed at 2012 Reuters Global Energy & Environment Summit barely two weeks ago seem a shade exaggerated.

At the event, IEA chief economist Fatih Birol said he was worried about high oil prices posing a serious risk putting at stake a potential economic recovery in Europe, US, Japan and China. Some were discussing that oil prices had found a floor in the US$90 to US$95 range. Yet, here we are two weeks later, sliding down with the bears! That’s all for the moment folks! Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo: TNK-BP Saratov Refinery, Russia © TNK-BP

Eurozone crisis vs. a US$100/barrel price floor

In the middle of a Eurozone crisis rapidly evolving into a farcical stalemate over Greece’s prospects, on May 13 Saudi Arabia’s oil minister Ali al-Naimi told a Reuters journalist at an event in Adelaide that he sees US$100 per barrel as a “great price” for crude oil. In wake of the comment, widely reported around the world, barely six days later came confirmation that Saudi production had risen from 9.853 million barrels  per day (bpd) in February to 9.923 bpd in March with the kingdom overtaking Russia as the world's largest oil producer for the first time in six years.

In context, International Energy Forum says Russia's output in March dropped to 9.920 million bpd from 9.943 million bpd in February. The Saudis exported 7.704 million bpd in March versus 7.485 million bpd in February but no official figure was forthcoming from the Russians. What al-Naimi says and how much the Saudis export matters in the best of circumstances but more so in the run-up to a July 1 ban by the European Union of imports of Iranian crude and market theories about how it could strain supplies.

Market sources suggest the Saudis have pumped around 10 million bpd for better parts of the year and claim to have 2.5 million bpd of spare capacity. In fact, in November 2011 production marginally capped the 10 million bpd figure at one coming in at 10.047 million bpd, according to official figures. The day al-Naimi said what price he was comfortable with ICE Brent crude was comfortably above US$110 per barrel. At 10:00 GMT today, Brent is resisting US$106 and WTI US$91. With good measure, OPEC’s basket price stood at US$103.49 last evening and Dubai OQD’s forward month (July) post settlement price for today is at US$103.65.

With exception of the NYMEX Light Sweet Crude Oil futures contract, the benchmark prices are just above the level described by al-Naimi as great and well above the breakeven price budgeted by Saudi Arabia for its fiscal balance and domestic expenditure as the Oilholic discussed in July.

Greece or no Greece, most in the City remain convinced that the only way is up. Société Générale CIB’s short term forecast (vs. forward prices) suggests Brent, Dubai and even WTI would remain comfortably above US$100 mark. The current problem, says Sucden Financial analyst Myrto Sokou, is one of nervousness down to mixed oil fundamentals, weak US economic data and of course the on-going uncertainty about the future of Eurozone with Greece remaining the main issue until the next election on June 17.

“WTI crude oil breached the US$90 per barrel level earlier this week and tested a low at US$89.28 per barrel but rebounded on Thursday, climbing above US$91 per barrel. Brent oil also retreated sharply to test a low at US$105 per barrel area but easily recovered and corrected higher toward US$107 per barrel. We continue to expect particularly high volatile conditions across the oil market, despite that oil prices still lingering in oversold territory,” she adds.

Not only the Oilholic, but this has left the inimitable T. Boone Pickens, founder of BP Capital Partners, scratching his head too. Speaking last week on CNBC’s US Squawk Box, the industry veteran said, “I see all the fundamentals which suggest that the price goes up. I am long (a little bit) on oil but not much…I do see a really tight market coming up. Now 91 million bpd is what the long term demand is globally and I don’t think it would be easy for the industry to fulfil that demand.”

Pickens believes supply is likely to be short over the long term and the only way to kill demand would be price. Away from pricing, there are a few noteworthy corporate stories on a closing note, starting with Cairn Energy whose board sustained a two-thirds vote against a report of the committee that sets salaries and bonuses for most of its senior staff at its AGM last week.

Earlier this year, shareholders were awarded a windfall dividend in the region of £2 billion following Cairn's hugely successful Indian venture and its subsequent sale. However, following shareholder revolt a plan to reward the chairman, Sir Bill Gammell, with a bonus of over £3 million has been withdrawn. The move does not affect awards for the past year. Wonder if the Greenland adventure, which has yielded little so far, caused them to be so miffed or is it part of a wider trend of shareholder activism?

Meanwhile the FT reports that UK defence contractor Qinetiq is to supply Royal Dutch Shell with fracking monitors. Rounding things up, BP announced a US$400 million spending plan on Wednesday to install pollution controls at its Whiting, Indiana refinery, to allow it to process heavy crude oil from Canada, in a deal with US authorities.

Finally, more than half (58%) of oil & gas sector respondents to a new survey of large global companies – Cross-border M&A: Perspectives on a changing world – conducted by the Economist Intelligent Unit on behalf of Clifford Chance, indicates that the focus of their M&A strategy is on emerging/high-growth economies as opposed to domestic (14%) and global developed markets (29%). The research surveyed nearly 400 companies with annual revenues in excess of US$1 billion from across a range of regions and industry sectors, including the oil & gas sector. That’s all for the moment folks! Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo: Oil worker in Oman © Royal Dutch Shell.